This alternating pattern of boom and bust is what the term business cycle means. In an article published in 1986, Edward Prescott forcefully argued that during the post-World-War II period, business cycles in the United States mostly resulted from random changes in the growth rate of business-sector productivity.1 He showed that upswings in economic activity occurred when productivity grew at an above-average rate and downswings occurred when productivity grew at a below-average rate.

This article appeared in the January/February 1999 edition of Business Review.

  1. Edward Prescott is a professor of Economics at the University of Chicago and a long-time research consultant to the Federal Reserve Bank of Minneapolis. The antecedents of his views appear in an article he wrote with Finn Kydland in 1982 and in a 1983 article by John Long and Charles Plosser.
View the Full Article